Reinvestment Rate

AAA

DEFINITION of 'Reinvestment Rate'

The amount of interest that can be earned when money is taken out of one fixed-income investment and put into another. The reinvestment rate is the amount of interest the investor could earn if s/he purchased a new bond, if the same investor is holding a callable bond that is called due because interest rates have declined. If the original bond paid 5% and the new bond pays 3%, the reinvestment rate is 3%.


The possibility of such an interest-rate drop is called "reinvestment rate risk".

INVESTOPEDIA EXPLAINS 'Reinvestment Rate'

Anticipated reinvestment rates play a role in investors' decisions about what term to select when purchasing a bond or CD. An investor who expects interest rates to rise might select a shorter-term investment, under the assumption that the reinvestment rate when the bond or CD matures will be higher than the interest rates that can be locked into on longer-maturity investments today.

RELATED TERMS
  1. Prime Rate

    The interest rate that commercial banks charge their most credit-worthy ...
  2. Effective Yield

    The yield of a bond, assuming that you reinvest the coupon (interest ...
  3. Annual Percentage Yield - APY

    The effective annual rate of return taking into account the effect ...
  4. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic ...
  5. Personal Finance

    All financial decisions and activities of an individual, this ...
  6. Reinvestment

    Using dividends, interest and capital gains earned in an investment ...
Related Articles
  1. Six Biggest Bond Risks
    Bonds & Fixed Income

    Six Biggest Bond Risks

  2. Callable CDs: Check The Fine Print
    Investing Basics

    Callable CDs: Check The Fine Print

  3. Callable Bonds: Leading A Double Life
    Options & Futures

    Callable Bonds: Leading A Double Life

  4. What are the risks of investing in a ...
    Investing

    What are the risks of investing in a ...

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center